Today's global market demands global
action, yet, according to the U.S. Department of Commerce (DOC), fewer than
10 percent of American manufacturing and service companies are involved in international
trade. However, like it or not, you're probably already competing globally 
foreign-owned companies are competing with you in your "domestic"
markets. You can turn global competition to your advantage by tapping markets
and labor supplies across international borders yourself  a process that
is simpler than you may believe. This Interactive Business Tool will help you
understand how to stretch your company's global reach. In addition to this discussion,
you will also find valuable information in a related module, How
to Enter an Emerging Foreign Market.

Extend the sales potential of existing products
with relatively low development costs

Stabilize seasonal or cyclical market
fluctuations

Enhance potential for corporate expansion

B. Watch Out For ...

In order to participate in global trade,
your business will need to incur additional costs, such as developing new promotional
material, traveling to foreign locations, modifying your product to meet the
needs of a new market, and shipping overseas. For these reasons, the decision
to embark on international trade should be done with eyes open.

There are several methods you can use to enter a
foreign market, including exporting, importing, licensing, joint ventures and off-shore
production. If you have an existing business that creates a tangible product, exporting is
the most common method. Start-up costs and risks are limited, and profits can be realized
early on. If you are beginning a new venture, the other choices are options that may
reduce some of the start-up risks.

There are two basic ways to export: directly or
indirectly.

A. Direct Exporting

In direct exporting, your company finds
a foreign buyer and then makes all arrangements for shipping your products overseas.
This method requires a lot of footwork and infrastructure, and entails more
risk, but the potential profit rewards are often higher. If you choose to export
directly, you have several options:

Sales Representatives/Agents -- Essentially, you
hire foreign-based representatives or "agents" who work on a commission basis to
locate buyers for your product, just as you would domestically.

Distributors -- You strike a deal with a foreign
distributor, who purchases merchandise from you and resells it with a markup. The
distributor maintains inventory and provides after-sales service to the buyer.

B. Indirect Exporting

Your company uses an export intermediary
to perform most of the details of the export arrangement. Many small businesses
choose this option, at least at the outset. There are several types of export
intermediaries:

Commissioned agents - These are brokers who link
your product or service with specific foreign buyers, allowing the primary company to
fulfill the order and handle packing, shipping and export documentation.

Export Management Companies (EMCs) and Export
Trading Companies (ETCs) -- These companies operate in the country where the goods are to
be exported. EMCs generally represent your product to promote it to other prospective
overseas purchasers, while ETCs usually work according to demand, finding a need and
sourcing your product for foreign buyers. Both types of companies usually take care of all
aspects of the export transaction (including conducting market research, promoting your
product overseas, accessing proper distribution channels, and locating foreign
distributors), making them a viable option for smaller companies that lack the time and
expertise to break into international markets on their own. EMCs and ETCs usually operate
on a commission basis, although some work on a retainer basis and some take title to the
goods they sell, making a profit on the markup. Importing and exporting can be done on any
scale  from a tiny home office or from the World Trade Center. You don't need a
license from the United States government in order to do international trade, but the
country with which you do business may require a license. What you do need is an
international business plan.

If you're already in business, you probably
already have a business plan. If so, you'll need to amend it to include the specifics of
international business. If not, you'll need to begin from scratch in order to define your
company's present status, internal goals and commitment, and to seek financial help if you
expect to pursue a bank loan or other types of investment. An international business plan
should define:

For your business to succeed globally, the
principles are the same as succeeding domestically: You need to find a product that will
fill a targeted need for the purchaser in export markets according to price, value to
customer/country and market demand. Do you have a product for which there is a market
overseas? Is there a product manufactured overseas that has a market domestically? If so,
you need to identify why your product will have a market overseas or why an imported
product will sell domestically. What gives your product a competitive advantage for an
overseas market? Who are the buyers for your product? Why would they buy from you? Take
the following steps to determine the feasibility of your international business plan.

A. Analyzing Your Industry

You need to identify where your industry
is today and predict the trends and directions that it will take over the next
three years. How competitive is your industry in the global market? To find
out, consult the following resources:

Talk to people in the same business
or industry, research industry-specific magazines, attend trade fairs and
seminars.

Contact SBA, your state international
trade office, a DOC country or industry desk in Washington, D.C., for federal
or state government market studies that have been conducted on your industry's
potential international markets.

Find export data on your industry
through your SBA or DOC district office. Contact the SBA at (202) 205-6720
or DOC at (202) 482-2867 for a district office near you.

B. Analyzing Your Business's Capabilities

If you have an existing business that
you are planning to expand globally, you probably are already doing a few things
right to have reached this point in your business. However, you'll need to assess
your business's strengths and weaknesses to determine what approach to take
in the international market. Ask yourself the following questions:

Why is your business successful in the domestic
market? What's your growth rate? What are your strengths?

What products do you feel have export potential?

What are the competitive advantages of your
products or business over other domestic and international businesses?

What are the needs that will be filled by your
product in a foreign market?

Will the product be restricted abroad (e.g.,
tariffs, quotas or non-tariff barriers)?

If the product is a consumer good:

Who will consume it? How frequently will the
product be bought?

Is consumption affected by climate or geography?

Will the product be restricted abroad (e.g.,
tariffs, quotas or non-tariff barriers)?

Does your product conflict with traditions,
habits or beliefs of customers abroad?

C. Selecting the Best Markets to
Enter

Although the three largest markets
for U.S. products are Canada, Japan and Mexico, these countries may not be the
largest markets for your product. If you're not sure where to do business, one
good indicator is to find out where your domestic competitors have expanded
internationally. Another useful resource are three key United States government
databases that can identify those countries that represent significant export
potential for your product: The Small Business Administration's Automated Trade
Locator Assistance System (SBAtlas), Foreign Trade Report FT925 and the U.S.
Department of Commerce's National Trade Data Bank (NTDB).

Once you've identified several countries that
you think have market potential for your product, you're ready to do serious market
research. Research and review data and information for the following factors for each
country.

D. Market Factors to Assess

Answer yes or no to the following questions to
asses the potential of specific countries.

1. Demographic and Geographic Factors

___ Is there sufficient
population size, growth and density in the correct demographic region? ___ Is the climate
compatible with your product? ___ Is the shipping
distance economically feasible? ___ Is there a sufficient
physical distribution and communication network? ___ Are the natural
resources you may need available?

2. Political Factors

___ Is the government
amenable to trade with the United States? ___ Is the country
politically stable? ___ Does the government
have heavy involvement in business? ___ Are there existing
trade restrictions, tariffs, non-tariff barriers or bilateral trade agreements?

3. Economic Factors

___ Is the economy
sufficiently developed to support your product? ___ Is foreign trade
a significant part of the economy? ___ Is the country's
currency stable? What is the inflation rate, availability, controls and stability
of exchange rate? ___ Is the per capita
income and distribution of income sufficient to support your product?

4. Social/Cultural Factors

___ What is the
literacy rate and average educational level in the country? ___ Is there a middle
class that would support your product? ___ Do the people
have sufficient disposable income and a propensity to spend money on products
similar to yours? ___ How is the market
similar to and different from your domestic market? ___ Are there language
and cultural barriers to doing business?

5. Market Access Factors

___ Are there limitations
on trade, such as high tariff levels or quotas?
___ What documentation will you need? ___ Are there local
standards, practices and other non-tariff barriers? ___ What is the country's
policy on honoring patents and trademark protection?

6. Distribution and Production Factors ___ Are there intermediaries
available if you need them? ___ Are there sufficient
regional and local transportation and storage facilities? ___ Is there labor available
with the skills you may need? ___ What are local manufacturing
conditions? ___ What are local labor laws?

When you're determining which foreign market to
enter, one of the key factors may be the existence or absence of tariffs and non-tariff
trade barriers. Tariffs are taxes imposed on imported goods in order to raise the price of
imported goods to the level of domestic goods. Often tariffs become barriers to imported
products because the amount of tax imposed makes it impossible for exporters to profitably
sell their products in foreign markets.

Non-tariff barriers are laws or regulations that
a country enacts to protect domestic industries against foreign competition. Such
non-tariff barriers may include subsidies for domestic goods, import quotas or regulations
on import quality. Countries with low trade barriers in place are usually not good choices
for global trade.

Once you've identified the product or service
you want to import or export and the country that interests you, you need to make business
connections in the chosen market. That is, you're looking for companies, agents or
distributors who are looking for the products you will offer and that may be interested in
doing business. You also need to determine whether you will handle your global business
directly or choose an agent, distributor or intermediary to act on your behalf, and if so,
you need to find someone qualified to do so.

The U.S. federal government, state governments,
trade associations, exporters' associations and foreign governments offer low-cost and
easily accessible resources to simplify and speed your entry into foreign markets. In
addition, almost every industry and product has a corresponding organization and
publication, even in developing countries. Consult these organizations and publications
for ads, articles and listings for companies that manufacture, buy or sell the product for
which you're looking. The Internet is a great boon for locating sources, since many
companies that do international business will have English-language Web sites. Keep in
mind, however, that Internet usage in most foreign countries lags behind United States
usage, so if you limit your sourcing options to what is on the Web, you may not find the
prices or selection you need.

The U.S. Department of Commerce (DOC) has a
number of contact programs in place that can help you make the connections you need.
Here's a run-down:

Export Mailing Lists - These are custom
searches of the DOCs databases of prospective overseers customers. You select market
criteria, then receive a list of relevant manufacturers, agents, retailers, service firms,
government agencies with names, addresses, contacts, products and other information.
Output is available as mailing labels or on disk.

Trade Lists - These are directories that
the DOC publishes for each country based on the information above.

Trade Opportunities Programs - This
service collects sales leads from overseas firms looking for U.S. products. Lead details
include specifications, quantities, delivery dates and bid deadlines.

Agent/Distributor Service - This is a
matching service that performs a custom search of foreign import agents and distributors,
contacts them with your company's literature and products, then prepares a report
identifying six prospects that are interested in doing business with you.

Here are a few other options for making contacts
(more information about accessing these will follow in the "Resources" section):

Once you've identified potential sources,
contact them to seek specific product information, such as specifications, product samples
and prices. Contact them by letter, fax, email, telex or cable. At this point, it's best
to translate your business's own literature into the language of the country where you
plan to do business. Although contacts at most foreign companies that do international
business will speak English, it's best to communicate in your potential source's language.

Pricing a product is always one of the most
important parts both of marketing a product and making a business profitable, and,
unsurprisingly, pricing a product for the overseas market is one of the most critical
factors for entering foreign markets. Prices must be high enough to generate a reasonable
profit, yet low enough to be competitive in overseas markets. Naturally, your cost of
goods sold must include all the expenses to move product to the port of destination, which
hike up the bottom line considerably, but don't forget that doing business internationally
affects your overhead as well.

Cost of Goods Sold

In addition to the material and labor
used in the manufacture of your product, you must consider:

Once you've determined your break-even price
based on the additional costs above, you're ready to set your prices. The selected pricing
structure should be part of your market penetration objectives. Your goals will vary
depending on the target overseas market. Ask yourself the following questions regarding
pricing:

Are you entering the market with a new or unique
product?Are you selling excess or obsolete products?Can your product demand a higher price because of
brand recognition or superior quality?Are you willing to reduce profits to gain market
share for long-term growth?

Obtain as much information as possible on local
market prices as part of your market research. Overseas distributors and agents of similar
products of equivalent quality can give you some insight.

A. Quoting a Price

The pro-forma (projected) invoice is
the most commonly used document to give price quotations to potential customers.
The quotation in a pro-forma invoice is usually considered binding, although
prices may change prior to final sale. To prepare the invoice, you should give
a detailed description of the product, an itemized list of charges and sale
terms. Prices should be quoted in United States dollars to reduce foreign exchange
fluctuation risks. The invoice should also indicate the period during which
the price quotation is valid.

B. Setting Terms of Sale

You should be familiar with the common
terms of sale used in international trade before preparing your pro-forma invoice.
Terms of the sale that you should spell out include:

Risk of Loss - This clause excuses the
exporter from responsibility where a default in performance is caused by events beyond the
exporter's control, such as war, acts of God or labor problems.

Payment and Finance Terms - This
describes when payment will be made, in addition to providing provisions for late
payments, partial payments and remedies for nonpayment.

Warranties - In some cases, the importer
will require the exporter to warrant that the goods meet certain standards of construction
and performance.

Acceptance of Goods - Frequently, the
importer will insist upon the right to inspect the goods upon delivery. If the goods do
not meet the standards set in the invoice, the importer can reject them.

Intellectual Property Rights - Protection
of the exporter's patents, trademarks or copyrights should be assured in the agreement, in
particular since these protections are frequently eroded when goods cross international
lines. Get this in writing.

Dispute Settlement - This is always a
good clause in any agreement of sale, but in an international agreement, it's especially
useful. Spell out how and where any disputes will be resolved and which nation's law
should be applied.

One of your primary concerns in entering the
overseas market is to be paid in full and on time. While the credit of a buyer is always a
concern, you may have less recourse when it comes to collecting unpaid international
debts, so you should exercise extra caution. Be sure that you and your buyer agree upon
the terms of the sale in advance.

The primary methods of payment for international
transactions, ranked in order of most secure to the exporter to least secure, include:

Payment in advance - This is the most
desirable, but it's usually just an option when the manufacturing process is specialized,
lengthy or capital intensive and requires partial or progress payments.

Letters of Credit (LC) - A letter of
credit is an internationally recognized instrument issued by a bank on behalf of its
client, the purchaser. The LC actually represents the bank's guarantee to pay the seller,
provided the conditions specified on it are fulfilled.

Documentary Collection (Drafts) -
Documentary collections involve the use of a draft, drawn by the seller on the buyer,
requiring the buyer to pay the face amount either on sight (sight draft) or on a specified
date in the future (time draft). The draft is an unconditional order to make such payment
in accordance with its terms, which specify the documents needed before title to the goods
will be passed.

Consignment - In this arrangement, the
importer only pays the exporter after the goods have been resold to another purchaser.
Title to the goods remains with the exporter until the purchase conditions are satisfied.
Consignment is very risky for the seller since there are no guarantees when or if the
goods will be sold, and in the meantime, the exporter's capital remains tied up in
inventory over which he or she has no control.

Open account - This means that payment is
due after the goods are manufactured and delivered (usually within 15, 30 or 60 days). In
other words, this is the typical way that business is conducted in the United States.
However, this method is considered risky internationally because your recourse to collect
unpaid debts is limited.

Once you've set terms of sale, the next
variation between selling a product domestically and internationally occurs: how to
transport the goods. One of the main differences between selling domestically and
exporting is the documentation required. Providing proper documentation with your
shipments is essential, if the goods are to arrive safely and on time.

Luckily, the role of the international freight
forwarder (your shipper) is to act as an agent for the exporter in moving cargo to the
overseas destination. These agents are familiar with the import/export rules and
regulations of foreign countries, methods of shipping, United States government
regulations and the documents connected with foreign trade.

Freight forwarders can help you with your order
from the start by advising you on freight costs, port charges, consular fees, costs of
special documentation and insurance costs as well as handling fees. Freight forwarders may
also recommend the best type of packing for protecting the merchandise in transit and
arrange to have the merchandise packed at the port or sealed in shipping containers. If
you plan to take advantage of these services, be sure you figure these additional export
costs into the price you charge your customer.

When the order is ready to ship, freight
forwarders should be able to review the letter of credit, commercial invoices, packing
list and other documentation to ensure that everything is in order. Following are the
paperwork documents that you may need to fill out to ship an order internationally.

International Shipping
Documentation

Commercial Invoice - This proves the
exporter's ownership of the goods and promises payment. The description of the goods on
the commercial invoice must correspond exactly to the description in the letter of credit
or other method of payment. It's usually best to prepare a commercial invoice in English
and in the language of the destination country.

Export License - You don't need a license
to export goods, unless it's possible that export could threaten United States national
security, affect certain foreign policies of the United States, or create short supply in
domestic markets. To determine whether you need a license, check with the U.S. Department
of Commerce's Bureau of Export Administration (BEA).

Shipper's Export Declaration (SED) - This
is used for mail shipments valued at more than $500 and required for other shipments
valued at more than $2,500 so that the Bureau of the Census can monitor exports. The SED
must be presented to the carrier before the shipment departs.

Certificate of Origin - Although the
commercial invoice may contain a statement of origin, some countries require Certificates
of Origin. Certificates of Origin allow for preferential duty rates if the exporter's
country has an agreement with the importer's country to allow entry of certain products at
lower tariffs.

Export Packing List - This itemizes the
material in each individual package and indicates the type of package and individual net,
legal, tare and gross weights and measurements for each package (in both U.S. and metric
systems). A copy of the packing list should be attached to the outside of a package in a
waterproof envelope marked "packing list enclosed." The list is used by the
shipper or forwarding agent to determine the total shipment weight and volume and whether
the correct cargo is being shipped. In addition, customs officials may use the list to
check the cargo. The original packing list should be forwarded along with your other
original documents in line with the conditions of sale.

Insurance Certificate - Most exporters
insure goods for 110 percent of their value.

Inspection Certificate - Many foreign
purchasers request that the seller certify that the goods being shipped meet certain
specifications. This certification is usually performed by an independent inspection firm.

Dock Receipts - This document transfers
shipping obligations from the domestic to the international carrier as the shipment
reaches the terminal.

Bill of Lading/Air Waybill - Bills of
lading and air waybills provide evidence to title of the goods and set forth the
international carrier's responsibility to transport the goods to their named destination.

Training Module Checklist

___ Have you identified the product you wish to
export?___ Have you decided whether to try direct
exporting or indirect exporting?___ Have you articulated why you're interested in
global trade?___ Have you identified the best market to enter?___ Have you identified who your potential export
markets (or import sources) and customers are?___ Have you determined how you plan to enter the
foreign market___ Have you calculated additional costs (travel,
shipping, marketing, sourcing) you will need to incur to enter the global market?___ Do you understand the legal requirements to
enter the markets that interest you?___ Have you determined how you plan to transport
the goods?